Capitalization-Weighted Indexes

Fundamental Indexation ArXiv ID: ssrn-713865 “View on arXiv” Authors: Unknown Abstract A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-vari Keywords: capitalization-weighted indexes, mean-variance, passive investing, benchmarking, portfolio optimization, Equities Complexity vs Empirical Score Math Complexity: 2.0/10 Empirical Rigor: 8.0/10 Quadrant: Street Traders Why: The paper presents a straightforward, intuitive strategy (fundamental indexing) with minimal mathematical derivations, but heavily relies on empirical backtests, real-world benchmark comparisons, and data analysis to challenge capitalization-weighted norms. flowchart TD A["Research Goal: Test if capitalization-weighted indexes are truly optimal"] --> B["Methodology: Compare Cap-Weighted vs. Fundamental Indexation"] B --> C["Data: Equities & Fundamental Metrics"] C --> D["Computation: Mean-Variance Optimization & Portfolio Simulation"] D --> E["Key Finding: Fundamental Indexation Outperforms Cap-Weighting"] E --> F["Outcome: Rejection of passive indexing as mean-variance efficient"]

Fundamental Indexation ArXiv ID: ssrn-604842 “View on arXiv” Authors: Unknown Abstract A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-vari Keywords: capitalization-weighted indexes, mean-variance, passive investing, benchmarking, portfolio optimization, Equities Complexity vs Empirical Score Math Complexity: 4.0/10 Empirical Rigor: 8.0/10 Quadrant: Street Traders Why: The paper involves moderate mathematical finance concepts like portfolio optimization and benchmark analysis, but it is heavily data-driven, featuring extensive backtesting, real-world index performance comparisons, and discussion of implementation for a trillion-dollar industry. flowchart TD A["Research Goal Test: Does capitalization weighting violate mean-variance efficiency?"] --> B["Methodology Constrained Optimization vs. Capitalization Weighting"] B --> C["Input: Historical Returns U.S. Large Cap Equities"] C --> D["Computational Process Maximize Sharpe Ratio Under Optimization Constraints"] D --> E{"Key Finding 1: Efficiency Optimal Portfolio Sharpe Ratio > Cap-Weighted Portfolio?"} E -- Yes --> F["Outcome: Cap-weighting is Mean-Variance Inefficient"] E -- No --> G["Outcome: Cap-weighting is Mean-Variance Efficient"] F --> H["Key Finding 2: Performance Fundamental Indexation Outperforms Cap-Weighting"] G --> H H --> I["Key Takeaway Trillion-dollar cap-weighted industry is suboptimal vs. optimized portfolios"]